Pension plan sponsors face challenges such as generating a sufficient return on assets to cover pension obligations, minimizing the frequency and the amount of contributions required over the life of the plan, and minimizing the key risks to a fund: equity risk and interest rate risk. Equities are subject to equity market risk due to regular fluctuations in stock prices but tend to have greater potential for higher returns. On the other hand fixed income instruments tend to be somewhat more stable but can be sensitive to interest rate risk due to changes in interest rates over time. Plan liabilities in defined-benefit plans are typically uncorrelated with movements in equities but can be sensitive to interest rate movements due to low interest rates magnifying the present value of future liabilities.
Conventional methods of managing pension portfolios generally involve either simple “rules of thumb”, such as the 60/40 equities/fixed income rule, or very complex reviews and analysis that can be time consuming and costly.
It is, therefore, desirable to provide an improved system and method for managing and, in particular, de-risking pension funds.